Time to sell
Investment group Brait has been performing exceptionally well, and remains one of the most favoured shares on the JSE. However, it’s momentum could slow quite soon.
group Brait, which is controlled by billionaire businessman Christo Wiese, has had a phenomenal run, bedding down a string of successful acquisitions since it sold its 37% stake in Pepkor in 2014. Its share price is up nearly 10-fold over the past five years; its net asset value (NAV) – a key benchmark for investment firms – is up 76.7% over the past financial year to R136.27.
Over the past three years, its NAV reflects a compound annual growth rate (CAGR) of 72.3% a year (compared with a benchmark of 15% a year). Its market capitalisation currently sits at R81.4bn, its dividend yield is at 0.4%, and it trades at a very cheap price-to-earnings ratio (P/E) of 2.01 times, according to INET BFA data. Headline earnings per share for the year to end March were down 8.5% to R41.41.
Brait’s investment strategy involves acquiring stakes in sizeable unlisted businesses operating in the broad consumer sector. Its recent acquisitions include an 89% shareholding in UK fashion retailer New Look; a 78% interest in gym operator Virgin Active; and increasing its stake in Iceland, a UK-based food retailer, from 19% to 57%. Its other major investment is 91.1% of Premier Foods, whose brands include Snowflake flour and Blue Ribbon bread, while it also holds smaller stakes in glass producer Consol, Primedia and local wine exporter DGB. The stakes in Consol and Primedia, held through Brait’s private equity fund Brait IV, have been earmarked for sale, with Brait saying in February that it plans to offload the stakes within two years, Business Day reported at the time.
Over the past financial year, highlights in its investment portfolio include growing its New Look footprint to 838 stores (2015: 809), which includes its first six stand-alone menswear stores in the UK, as well as expanding its number of stores in China to 85, up from 19 in the previous financial year. Virgin Active has also been increasing its footprint in Southern Africa (including opening its first gym in Botswana), Europe and Asia Pacific, and growing total membership by 3% to 1.47m. It sees “enormous scope for its premium, high-end fitness clubs” in Asia and plans to invest up to £150m over the next six years to open up to 20 clubs in Thailand (up from the current three) and between eight and 10 in Singapore (currently one), Brait said.
Brait remains one of the most favoured shares on the JSE for a number of reasons: it has a diverse revenue base, good fundamentals, an exceptional track record of capital allocation decisions and its recent transactions have been well executed. But despite this, sentiment on the charts seems rather passive – with upside momentum looking to potentially correct in the near term. Possible scenario: Encountering major resistance at 17 400c/ share, Brait has been rangebound between 17 400c/ share and 14 200c/share since November 2015. With the three-week relative strength index (RSI) negatively diverging, support at 14 200c/share could give in – potentially spurring the descending phase of a toppingout pattern, with first target situated at 11 000c/share. Alternative scenario: Upside above 17 400c/share could see Brait appreciate further to 20 600c/share in the short term. However, it would remain overextended. For those investors who are looking to buy Brait for the long term, I would suggest not, and for those investors who are heavily exposed – sell on every uptick.